Using Monte Carlo Analysis to Assess Outcome-based Payment for Environmental Services for Denitrifying Bioreactors in the Chesapeake Bay

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Virginia Tech


Conventional nonpoint source pollution policies encourage the adoption of conservation practices to reduce nonpoint source pollutants by paying a portion of the cost to install best management practices. Alternative financial incentive programs, such as payment for environmental services (PES) programs, aim to improve program effectiveness by paying directly for the quantity of environment services provided, but implementing PES programs to reduce nonpoint source pollution has been challenging given the costs and technical feasibility of measuring pollutant outcomes. Bioreactors, engineered sinks that convert biologically available forms of nitrogen into an inert form (N_2), have recently been proposed to treat and remove legacy nitrogen from springs (Easton et al., 2019). Since nitrogen removal can be directly measured, there is potential to implement an outcome-based PES program. Little information exists on the costs and risks sellers face under such a program or the impact of contractual conditions. This research applies Monte Carlo simulation to a case study bioreactor in the Chesapeake Bay Watershed to estimate the financial risks and rewards to N removal service providers under different outcome-based PES contractual conditions. Results indicate that under a fifteen-year contract term and price of $25/lb/yr of nitrogen removal, outcome-based PES for denitrifying bioreactors has a high chance of generating positive financial outcomes for a commercial size case study bioreactor that removes an average of 1,279 lbs of N annually.



Denitrifying bioreactor, payment for environmental services, Chesapeake Bay